Money formula
Simple Interest Formula
Learn the simple interest formula for principal, annual rate and time.
Formula
Interest = principal × annual rate × yearsWhat the formula means.
Multiply the starting principal by the annual interest rate expressed as a decimal and by the number of years. Simple interest does not add previous interest to the principal.
Interest is calculated only from principal.
Convert the percentage rate to a decimal.
Time and rate must use compatible periods.
Variables.
PPrincipal
Starting amount borrowed or invested.
rAnnual rate
Annual rate expressed as a decimal.
tTime
Length of the period in years.
IInterest
Total simple interest over the period.
Worked example.
$5,000 at 5% for 3 years
- 5% = 0.05
- $5,000 × 0.05 × 3 = $750
Try your own numbersSimple Interest Calculator
↗Common mistakes.
- Compounding the interest when the problem specifies simple interest.
- Using 5 instead of 0.05 for a 5% rate.
- Mixing monthly time with an annual rate without conversion.
Quick questions.
How do I find the final amount?
Add the calculated simple interest to the principal.
Can simple interest be used for part of a year?
Yes, if time is expressed as the corresponding fraction of a year.